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A Strong, Sustainable Future for FATCA and Tax Compliance

November 14, 2012

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

In 2010 Congress enacted the Foreign Account Tax Compliance Act (FATCA), which aims to combat tax evasion by U.S. citizens holding investments in offshore accounts. Under this law, the IRS and the U.S. Department of the Treasury require U.S. taxpayers holding financial assets on foreign soil to report those assets. FATCA also requires foreign financial institutions to report certain information about U.S. taxpayers directly to the IRS. The Treasury planned to phase in the law’s requirements in several stages. Starting in 2013, the IRS would require participating banks to conduct due diligence for identifying new and pre-existing U.S. accounts and reporting requirements would begin in 2014.

FATCA faced a lot of criticism from both Americans living abroad, foreigners, and heads of foreign institutions. Institutions maintained there are “huge expenses” associated with implementation; American Citizens Abroad claimed it would “destroy the lives average, honest and hard working Americans;” and other opponents called it “big brother” legislation. My own post about FATCA compliance got a lot of the same remarks.

Partly in response, the Treasury has modified its approach. I don’t agree with much of the criticism, nor do I admire the opprobrium. At the same time, however, I do believe the extended approach represents a strong, sustainable future for global tax compliance.

Here’s what it does. Rather than exclusively working with financial institutions to implement FATCA, the Treasury will work directly with governments. Under this model, the U.S.government will establish bilateral agreements that will allow for automatic exchange of tax information. In the Task Force’s ideal model, these agreements would require both the U.S. and partner governments to collect data from their own financial institutions on income, gains, and property paid to non-resident individuals, corporations, and trusts and then automatically provide that data to their partner countries. In practice, these may look slightly different.

The Treasury has already completed one bilateral agreement with the United Kingdom and is in the process of finalizing others with a broad suite of other countries including: France, Greece, Canada, Ireland, Isle of Man, the Netherlands, and Norway. They’re also engaging with a broad range of countries, some of which would make very interesting partners, including the Cayman Islands, Cyprus, Estonia, Liechtenstein, Malaysia, and Malta.

In the long-run this is a strong, sustainable approach because it’s two-sided. The U.S. Treasury will benefit by reducing tax evasion in offshore banks, but those foreign countries will also benefit as they strengthen their own tax compliance. As Heather Lowe, legal counsel and director of government affairs at GFI, noted: “The U.S. should not be a safe haven for the dirty money of foreign tax evaders, just as foreign financial institutions should not harbor the illicit assets of U.S. tax evaders.”

This complementary approach is balanced, which may be more palatable to its opponents, but even better, it’s a more sustainable model for increasing global tax compliance. We shall see what the world says.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

  • Samuel Clemmons

    Wow. This is a fantastic idea. We all know that people have been hiding their money in low tax regions such as New Zealand, Canada, Norway, Sweden, France, and Slovenia. We need to create some laws and some complex regulations and expensive software and hire more IRS agents so that we can find those evil people and punish them.

  • Gary Hess

    If we could convince the whole world to move to citizenship-based taxation instead of residence-based taxation, it might be possible to come up with a truly “two-sided” approach. For some reason, however, only the United States and Eritrea tax their non-resident citizens.

    • http://twitter.com/FATCA_Fallout Marvin Van Horn

      That is a GREAT idea. NOT! I take it your comment is tongue-in-check.

      Fortunately, the rest of the world has not gone so mad, yet, However, knowing that we live in a copy cat world when it comes to taxation matters, I am sure there are lots of governments with BIG deficits these days that are actively considering that model. FATCA has made it all seem possible. The U.S. as shown the way, and all the FFIs and those that enthusiastically support IGAs are just capitulating, so why not? I bet those Greeks are eyeing off their relatively rich diaspora in Australia, and thinking, “if Citizenship taxation it is good enough for America, it is good enough for us!”

      Here are two thought experiments of what might happen if everyone copied the US model. Let’s hope they aren’t that stupid to follow them, but then again, as we see, there are the FATCANATICs of the world that think this Global Tax Data exchange idea, GATCA is a GREAT leap forward for mankind. They are silly enough to call it, “Financial Integrity and Economic Development!”

      The Systemic Risks of Citizenship Taxation http://bit.ly/NJlfPw

      The Accidental Kenyan http://bit.ly/LX1m5G

  • Margo

    You say ” In the Task Force’s ideal model, these agreements would require both
    the U.S. and partner governments to collect data from their own
    financial institutions on income, gains, and property paid to NON-RESIDENT individuals, corporations, and trusts and then
    automatically provide that data to their partner countries”

    If only that were true. In fact there is nothing anywhere in anything I have seen that refers to “non-residents” of the partner countries. According to the model agreement, the information is reported on “US persons” whether they are long term, tax compliant residents of the partner country in question or not.

    It may well be the intention of this legislation to “combat tax evasion” and if it were better designed to do that it would much less problematic. As it is there may potentially be an enormous amount of data transmitted about ordinary, honest residents of other countries. Aside from the concerns about invasion of their privacy, it is bound to cost someone a lot of money to collect and process all of that date that leads to no tax benefit to anyone.

  • Blaze

    Ann: I will try not to use too much opprobrium. I hope you will answer the following questions for me to help me understand why FATCA is such a great idea.

    1. Why should US and IRS be able to access any financial information about me? When I became a Canadian citizen in 1973. US Consulate was very clear, firm and direct that I was “permanently and irrevocably” relinquishing my US citizenship by swearing an Oath of Allegiance to another nation. At that time, the Canadian citizenship oath contained another oath renouncing any other citizenship. US Consulate knew that. US and IRS did not care about me then. I was young. I didn’t have any money. Now that I am 61 and semi-retired, they suddenly want to reclaim me and my money? Why do they think they have the right to do that?

    2. Why should US laws override the laws and constitution of the country where I have been a citizen for four decades? Canadian law prohibits credit unions, insurance companies from asking about place of birth or citizenship. Treating people differently based on national origin violates Canadian Human Rights laws. Canadian Supreme Court in a case involving IRS said in no circumstances, either directly or indirectly, will the revenue laws of another country be enforced in Canada. Canadian Charter of Rights and Freedoms also prohibits discrimination based on national origin, which Canadian courts have determined includes citizenship.

    3. Why should IRS and US have the right to any information of children born outside to US to a parent born in US when that adult child has never done anything to access US citizenship?

    4. Why should my bank (where I have been a customer for 32 years) and my credit union (where I have been a customer for 14 years) be expected to close my account when I refuse to give them information about my place of birth or give them consent to release information to a foreign government? Why should they lose me as a customer? More importantly, why should they be expected to break the laws of Canada, which prohibit them from releasing such information without consent.

    5. Why should CRA be expected to collect information about me to transmit to IRS. No other Canadian citizen must submit information about their total assets and investments to CRA. Only income from those assets must be submitted–on which we pay taxes to Canada

    6. Why doesn’t the 70 year effective tax treaty between Canada and US suffice? This tax treaty provides for the exchange of information on each other’s residents who received income from the other country.

    7. How would US respond if other countries demanded such information on their former citizens living in US? Remember, IGAs are only asking for information on residents of those countries who have money invested in US. Except for Eritrea and US, other countries tax on world-wide income of their residents, not on their citizens

    8. How would your ancestors have responded if their home country demanded such information about them and their children and demanded that their banks treat them in such a manner? In fact, if I remember my US history lessons corrrectly, I think a Revolutionary War was fought and won on issues such as taxation without representation and the right to choose one’s citizenship. And, something called the Declaration of Independence incorporated those very principles.

    9. How would you feel if the countries of your ancestors declared you were a citizen of those nations, demanded you file income tax returns (for which you would have to hire expensive professionals), demanded you provide information about all of your assets (not just the income from those assets), demanded your bank release that information to that foreign government and demanded that your bank close your accounts if you did not consent. I certainly don’t have the right to reply for you, but I suspect you reaction might involve some opprobrium.

    I do hope you will respond to these questions to help me understand why FATCA has such a strong, sustainable future.

    • http://www.financialtransparency.org/ E.J. Fagan

      If this were simply a problem of U.S. citizens living abroad not paying the gap between their foreign tax credit and their income tax, FATCA wouldn’t have been necessary. This is the case of U.S. citizens hiding money in far away places for no purpose other than evading taxes. That’s illegal, and it makes perfect sense for the IRS to go after that money. FATCA creates big time incentives for banks to get along with the IRS, and those discussions have created (the subject of Ann’s post), a productive country-to-country dialogue about useful information exchange. Hopefully the next step is expanding that discussion to a true worldwide system, so tax evaders around the world aren’t able to shift the burden of paying for civilization to the rest of us.

    • Blaze

      I have no problem with IRS going after real “tax evaders” and “tax cheats.” I and other resent being targeted and labelled as such just because we choose to live elsewhere and become citizens of other countries.

      I am NOT a US citizen living abroad. I have been a citizen of another country for 40 years. US told me clearly and firmly I was relinquishing US citizenship by becoming a citizen of Canada. Yet, now they somehow think they have the right to force my bank to reveal all of my financial information to them and to force my bank to close my account if I will not agree.

      Please go back and read my questions and tell me how any of this makes any sense in my situation or in the situation of millions like me around the world–including joint accounts held with spouses who were born outside US and in some cases have never even set foot on US soil.

      IRS can easily rectify the problem. Ensure guidelines and enforcement does not include those living elsewhere. IRS and Congress are very aware of the problems. They are choosing to proceed full speed ahead in stalking them.

      Instead of Land of the Free, US is quickly becoming Land of the Flee. You may want to read this. http://ind.pn/SJVEX

    • AtticusinCanada

      Then do as the rest of the reasonable world does and tax based on residency rather than citizenship. No one who uses zero services in YOUR country should be subjected to your reporting requirements. No one in Canada is running up here to hide from taxes. To think otherwise is insanity. Furthermore, you have zero right to the information of my Canadian only spouse. There will be lawsuits here as FATCA DOES violate our Charter of Rights and Freedoms. Something that might mean little to you Americans but, it means a whole lot here in Canada. The U.S. over steps it’s bounds and stomps all over the rights of sovereign nations all over the world. What money in Canada would the IRS be going after? The vast majority of Americans here would owe the U.S. ZERO taxes due to our current agreement already in place. There is no good reason to implement FATCA here as it violates not only our Charter of Rights and Freedoms but, several other laws as well. It is YOUR “law” not ours. I get it that the U.S. thinks it has the right to police the universe but, you’ll have to understand that citizens of other countries do not have think you fair or right or moral for doing so. Especially when it harms low and middle income families abroad, violates their rights on their home soil and will make the U.S. even more disliked here than it already is. This law is one of the most ludicrous things I’ve seen the U.S. do. FATCA was NOT written to go after low and middle income expats all over the world or in high tax countries. It was originally written to go after those drug lords, and criminals inside the U.S. “off shoring” huge sums outside the country they live in. Instead it has morphed into a penalty grab on zero tax owed everywhere in the universe. Given the current news about the NSA citizens of foreign nations have good reason to distrust the U.S. with their data.

      There will be law suits here if Canada tries to go along with this. http://www.greenparty.ca/sites/greenparty.ca/files/attachments/peter_hogg_fatca.pdf

    • AtticusinCanada

      Then do as the rest of the reasonable world does and tax based on residency rather than citizenship. No one who uses zero services in YOUR country should be subjected to your reporting requirements. No one in Canada is running up here to hide from taxes. To think otherwise is insanity. Furthermore, you have zero right to the information of my Canadian only spouse. There will be lawsuits here as FATCA DOES violate our Charter of Rights and Freedoms. Something that might mean little to you Americans but, it means a whole lot here in Canada. The U.S. over steps it’s bounds and stomps all over the rights of sovereign nations all over the world. What money in Canada would the IRS be going after? The vast majority of Americans here would owe the U.S. ZERO taxes due to our current agreement already in place. There is no good reason to implement FATCA here as it violates not only our Charter of Rights and Freedoms but, several other laws as well. It is YOUR “law” not ours. I get it that the U.S. thinks it has the right to police the universe but, you’ll have to understand that citizens of other countries do not have think you fair or right or moral for doing so. Especially when it harms low and middle income families abroad, violates their rights on their home soil and will make the U.S. even more disliked here than it already is. This law is one of the most ludicrous things I’ve seen the U.S. do. FATCA was NOT written to go after low and middle income expats all over the world or in high tax countries. It was originally written to go after those drug lords, and criminals inside the U.S. “off shoring” huge sums outside the country they live in. Instead it has morphed into a penalty grab on zero tax owed everywhere in the universe. Given the current news about the NSA citizens of foreign nations have good reason to distrust the U.S. with their data.

      There will be law suits here if Canada tries to go along with this. http://www.greenparty.ca/sites/greenparty.ca/files/attachments/peter_hogg_fatca.pdf

    • AtticusinCanada

      Then do as the rest of the reasonable world does and tax based on residency rather than citizenship. No one who uses zero services in YOUR country should be subjected to your reporting requirements. No one in Canada is running up here to hide from taxes. To think otherwise is insanity. Furthermore, you have zero right to the information of my Canadian only spouse. There will be lawsuits here as FATCA DOES violate our Charter of Rights and Freedoms. Something that might mean little to you Americans but, it means a whole lot here in Canada. The U.S. over steps it’s bounds and stomps all over the rights of sovereign nations all over the world. What money in Canada would the IRS be going after? The vast majority of Americans here would owe the U.S. ZERO taxes due to our current agreement already in place. There is no good reason to implement FATCA here as it violates not only our Charter of Rights and Freedoms but, several other laws as well. It is YOUR “law” not ours. I get it that the U.S. thinks it has the right to police the universe but, you’ll have to understand that citizens of other countries do not have think you fair or right or moral for doing so. Especially when it harms low and middle income families abroad, violates their rights on their home soil and will make the U.S. even more disliked here than it already is. This law is one of the most ludicrous things I’ve seen the U.S. do. FATCA was NOT written to go after low and middle income expats all over the world or in high tax countries. It was originally written to go after those drug lords, and criminals inside the U.S. “off shoring” huge sums outside the country they live in. Instead it has morphed into a penalty grab on zero tax owed everywhere in the universe. Given the current news about the NSA citizens of foreign nations have good reason to distrust the U.S. with their data.

      There will be law suits here if Canada tries to go along with this. http://www.greenparty.ca/sites/greenparty.ca/files/attachments/peter_hogg_fatca.pdf

    • AtticusinCanada

      Then do as the rest of the reasonable world does and tax based on residency rather than citizenship. No one who uses zero services in YOUR country should be subjected to your reporting requirements. No one in Canada is running up here to hide from taxes. To think otherwise is insanity. Furthermore, you have zero right to the information of my Canadian only spouse. There will be lawsuits here as FATCA DOES violate our Charter of Rights and Freedoms. Something that might mean little to you Americans but, it means a whole lot here in Canada. The U.S. over steps it’s bounds and stomps all over the rights of sovereign nations all over the world. What money in Canada would the IRS be going after? The vast majority of Americans here would owe the U.S. ZERO taxes due to our current agreement already in place. There is no good reason to implement FATCA here as it violates not only our Charter of Rights and Freedoms but, several other laws as well. It is YOUR “law” not ours. I get it that the U.S. thinks it has the right to police the universe but, you’ll have to understand that citizens of other countries do not have think you fair or right or moral for doing so. Especially when it harms low and middle income families abroad, violates their rights on their home soil and will make the U.S. even more disliked here than it already is. This law is one of the most ludicrous things I’ve seen the U.S. do. FATCA was NOT written to go after low and middle income expats all over the world or in high tax countries. It was originally written to go after those drug lords, and criminals inside the U.S. “off shoring” huge sums outside the country they live in. Instead it has morphed into a penalty grab on zero tax owed everywhere in the universe. Given the current news about the NSA citizens of foreign nations have good reason to distrust the U.S. with their data.

      There will be law suits here if Canada tries to go along with this. http://www.greenparty.ca/sites/greenparty.ca/files/attachments/peter_hogg_fatca.pdf

  • Samuel Clemmons

    Another good idea might be to search those databases and send back information about who is sending suggestive material to whom. This could be matched up with the databases upon who is married to whom. If there are any discrepancies, they can be reported directly to the media for further scrutiny.

  • Samuel Clemmons

    Let’s discuss the real and true penalty structure of FATCA. The penalty for each US-person / New Zealander’s FBAR form is $10,000 per account per year—-if you can prove that you didn’t do what you didn’t know what to do was nonwillful. If you can’t, then the penalty is $100,000 per year per account. These are the penalties associated with the FATCA discussed in the bill. Then we go on next to the penalties for form 8938, which are similar or harsher. Do you believe that these penalties are a sustainable model for increasing global tax compliance of the old men and old ladies they are seeking out?

  • statelessman

    U.S. citizens are just like free range chickens, they can move to another country, but they are still on the U.S. tax farm.

  • LongShortman

    1) A Financial Times article on September 22, 2012 stated that the China Development Bank was postponing a $2 billion loan for a $13 billion housing development project in the San Francisco area due to uncertainties regarding FATCA.

    2) Dick Harvey, a FATCA architect, mentioned in a Tax Notes paper in August 2012 that banks in Switzerland were not only denying bank accounts to US Persons residing there but were also cancelling their existing mortgages due to FATCA.

    3) The US Ambassador to Switzerland stated in a recent newspaper interview that 411 US citizens had renounced their citizenship in the period January to September 2012, an increase from 160 for the period January to December 2011. He stated that this was due to their inability to maintain banking relationships resulting from increased regulations (FATCA).

    4) A compliance person told me this summer that Americans were being removed as signatories and directors from overseas subsidiary companies due to FATCA and were being replaced by English-speakers from the UK, Canada, Australia and other countries.

    To summarize, FATCA has already resulted in lost jobs and opportunities, hardships for Americans working abroad and US citizenship renunciations. Possibly someone without a vested interest could review again how FATCA is supposed to help the US.

  • Moby

    Sheesh. FATCA IGAs are a discriminatory piece of filth. The primary reason IGAs have been proposed is to help the sniveling foreign banks circumvent their local anti-discrimination and human rights laws that make it more difficult for them to comply directly with FATCA. These laws serve the purpose of preventing the discrimination against things such as race, sexual orientation, NATIONAL-ORIGIN and CITIZENSHIP. In some countries (obviously not the US) discrimination is considered a bad thing and worthy of legislating against. It’s a travesty that governments are lining up to discard their peoples’ human rights by undoing such legislation to allow discrimination. And the reciprocity that is spoken of in the Model IGA is a vague, non-committal, half-promise by the US government that may never actually fulfilled.

    I am actually in favour of automatic and reciprocal exchange of information between countries on their respective residents to reduce tax evasion. Unfortunately FATCA is a parody of this goal that is discriminatory/harmful against American citizens living abroad, expensive, and counter to domestic policies. I’m also in favour of the police apprehending bank robbers, but I’d rather the bank robber got away than the cops start shooting into a crowd in the hope of hitting the bad guy.

    This piece of journalism seems to be uniquely American, with the attitude that all collateral damage is acceptable if some tiny gain can be made in the process. Before you put pen to paper on the subject again I suggest you read beyond the US govt press releases on FATCA; you can start here:
    http://americansabroad.org/download_file/view/266/354/

    • Blaze

      Yikes Moby. Your first paragraph sounds like opprobrium. Careful–Ann doesn’t like that.

      I think we can all agree exchange of information on respective residents is a good move. That is what Canada and US have had for 70 years, which is what makes it so frustrating that would not suffice for the two countries. It could also serve as an excellent model for other countries willing to work cooperatively to combat true tax evasion. But, no, the US is determined to hunt down and stalk both their citizens and former citizens. Oops. Does that sound like opprobrium? It is not meant as such–just reality for those of us who chose to live elsewhere.

  • Mary

    These so called “bilateral” agreements are worthless to countries having residence based taxation, i.e. every country in the world except the USA and Eritrea.

  • Pingback: FATCA – “I’d Like To Teach The World To Sing (In Perfect Harmony)” – Seven reasons to not do a FATCA IGA « Freedom from the tyranny of U.S. citizenship-based taxation for U.S. and dual citizens outside the U.S.

  • Tim12278

    The Canadian Civil Liberties Assocation just came out AGAINST an intergovernment agreement to implement FATCA in Canada. More Here:

    http://ccla.org/2012/12/04/ccla-registers-privacy-concerns-over-ongoing-canada-u-s-information-exchange-negotiations/

    Abby Deshman head of CCLA Public Safety Program is the point person on FATCA

    http://ccla.org/about-us/staff/

  • Tim12278

    More FATCA news

    Big Anti-FATCA rally and information session December 15th Victoria College Building Room 115 at University of Toronto. Doors open 10:00 AM. Use either TTC Subway Stop Queen’s Park or Museum on the University Spadina Line.

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